Is Sun Yad ConstructionLtd (TWSE:1316) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Sun Yad Construction Co.,Ltd (TWSE:1316) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sun Yad ConstructionLtd

What Is Sun Yad ConstructionLtd's Debt?

The chart below, which you can click on for greater detail, shows that Sun Yad ConstructionLtd had NT$4.44b in debt in March 2024; about the same as the year before. However, because it has a cash reserve of NT$1.53b, its net debt is less, at about NT$2.91b.

How Healthy Is Sun Yad ConstructionLtd's Balance Sheet?

We can see from the most recent balance sheet that Sun Yad ConstructionLtd had liabilities of NT$6.06b falling due within a year, and liabilities of NT$143.1m due beyond that. Offsetting this, it had NT$1.53b in cash and NT$193.6m in receivables that were due within 12 months. So it has liabilities totalling NT$4.48b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of NT$5.60b, so it does suggest shareholders should keep an eye on Sun Yad ConstructionLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sun Yad ConstructionLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Sun Yad ConstructionLtd had a loss before interest and tax, and actually shrunk its revenue by 67%, to NT$763m. To be frank that doesn't bode well.

Caveat Emptor

While Sun Yad ConstructionLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$202m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$865m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Sun Yad ConstructionLtd .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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